Taxation challenge Huzaima Bukhari & Dr. Ikramul Haq We are becoming weary of exposing the manipulation of collection figures by the Federal Board of Revenue (FBR) as it makes no difference to the top brass—they claim to have full ‘political backing’ and are above accountability. Most of our friends keep on advising us that writing about FBR’s hopeless performance is nothing but an exercise in futility—it is like bhens kay aagay been bajana (playing flute before a buffalo). Undoubtedly, this vital institution has become totally ineffective due to continuous political interferences, corruption and maladministration. Many a times, we have suggested that FBR should be insulated from political influences with a foolproof system of checks and balances to ensure proper revenue collection, but nobody has ever bothered to consider it In the fiscal year 2012-13, FBR miserably failed to collect the three times downward-revised budget. The massive shortfall of Rs 444 billion forced the government to borrow more money to meet the burgeoning fiscal deficit and putting further strain on the next year budget as allocation on debt servicing increased substantially. Fiscal Policy Statement for 2013-14, issued by the Debt Policy Co-ordination Office of Ministry of Finance, revealed that The fiscal deficit increased to 8 percent against the budgeted target of 4.7 percent of GDP mainly owing to around 19 percent slippages in the FBR budgeted tax revenue, under estimation of subsidies and interest payments. The fiscal deficit includes Rs 322 billion on account of settlement of power sector circular debt without which the fiscal deficit is calculated at 6.6 percent. FBR collected only Rs 1,936 billion against the target of Rs 2,381 billion - just 3 percent growth, the lowest in 13 years. Despite its miserable performance, FBR officers received hefty rewards and bonuses. Earlier, in fiscal year 2011-12, FBR failed to meet the target of Rs 1,952 billion - shortfall was Rs 75 billion. In fiscal year 2010-11, the shortfall was of Rs 38 billion, though in the late hours of 30 June 2011, the then chairman with his favourites claimed that FBR collected Rs 1,590.4 billion against the revised target of Rs 1,588 billion - a false claim, which was exposed by the media in the wake of resignation of Shahid Kardar, a man of impeccable integrity, who as State Bank Governor refused to participate in the dirty game of manipulating tax collection figures. He was not ready to accede to the kind of verification Ministry of Finance and FBR wanted. Due to his bold stance and medias exposure, FBR retreated and admitted that actual collection was only Rs 1,550 billion. Chairman FBR and his favourites, even after confession of cheating and fraud remained unpunished. The FBR is in shambles. It has become an epitome of inefficiency, corruption, indiscipline (infighting between various groups) and highhandedness. It has failed on all fronts: collection targets, widening of tax base, countering tax evasion and avoidance, recovery of arrears, voluntary compliance and reform process. We have written repeatedly that FBR is guilty of criminal negligence in not taxing persons having taxable incomes, but extorting money from those who earn below taxable income - majority of the people subjected to withholding taxes have below taxable incomes - there is no mechanism to refund them what was withheld. FBR has been misreporting the figures regarding income tax payers in Pakistan - there are not less than 50 million paying income tax under withholding system, though return filers this year are little over 900,000. Failure is entirely that of FBR, as it remained unsuccessful in enforcing tax codes, compelling those having taxable income to file returns. Its performance is pathetically abysmal in achieving a satisfactory tax-to-GDP ratio [at 8.2% it is one of the lowest in the world]. It is just thriving on withholding taxes and voluntary payments - constituting nearly 90% of total collection. The contribution of field officers [collection on demand through investigation or audit] is just 10% of total collection proving beyond any doubt how unproductive this organisation has become. Paying Taxes 2014 is a unique study by the World Bank that investigates and compares tax regimes across 189 countries world-wide and ranking them according to the relative ease of paying taxes. Pakistan is ranked at 166 out of 189-a sad reflection on FBR. According to the report, the time taken for compliance is 577 hours (if you take 8 working hours per day this comes to 72 man days). These 577 hours do not include the time spent on tax deductions by taxpayer under tax deduction regime (which accounts for over 65% of total direct tax collections). Asia average time is 232 hours. In the previous year report [2013], the time for compliance in Pakistan was 560 hours. On the one hand FBR is resorting to all kinds of negative tactics to show higher tax collection [Tax mobilisation strategy, Business Recorder, March 21, 2014], and on the other has miserably failed to collect minimum income tax from some companies even though the issue stands decided by the Federal Tax Ombudsman (FTO) against them. In the light of the decision of FTO, the association of employees suggested in a letter to Chairman FBR that the Commissioners should reject the exemption certificates and retrieve the refunds issued in such cases. Till today no retrieval of tax is made and many cases have become time-barred for the purpose of section 122 of the Income Tax Ordinance, 2001. In public, the general perception is that non-gazetted employees of FBR cause loss of revenue, but the reality is that the higher officers are allegedly the real culprits. As evident from above, the issue is not that of tax potential, but existence of a highly inefficient and corrupt tax apparatus that is the root cause of the present pathetic state of affairs. The tax officials persistently and ruthlessly squeeze and penalise the existing taxpayers while eagerly collaborating with the tax evaders - massive evasion is not possible without their abetment as in the case of companies mentioned by FTO. Small business houses and salaried persons, already heavily taxed through withholding tax mechanism, are victims of the FBRs autocracy. It is high time that FBR tax the rich and mighty tax evaders. It must tell the nation through media how many rich lawyers, doctors, other professionals, high-ranking civil-military bureaucrats, parliamentarians and businessmen, including their dependants have amassed colossal wealth, but not paying any income tax. They must be asked about the sources from which they enjoy a life of luxury whereas the poor are dying of thirst, starvation and untreated illnesses. (The writers, tax lawyers and Adjunct Faculty at Lahore University of Management Sciences (LUMS), are partners in law firm, HUZAIMA & IKRAM [member Taxand])
Posted on: Fri, 28 Mar 2014 01:27:39 +0000
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